Canceling nearly 90% of cash in circulation cost India the mantle of world’s fastest-growing large economy in 2016, the International Monetary Fund said, though it categorized the slowdown as temporary.
India’s growth slowed to 6.6% last year from 7.6% in 2015, according to the fund’s latest World Economic Outlook, which estimates that China’s economy grew by 6.7% in 2016. The fund expects India’s expansion to bounce back to 7.2% this year and accelerate to 7.7% in 2018. China, meanwhile, is projected to continue decelerating, to 6.5% in 2017 and 6.0% the year after.The IMF said it trimmed its 2016 forecast for India by one percentage point “primarily” because consumers tightened their purse-strings after November’s currency invalidation.
The fund’s sister institution, the World Bank, doesn’t think that was enough for India to lose the global growth crown, however. In the latest update to its global forecasts, released last week, the bank lowered its estimate of India’s 2016 growth to 7.0%—down from its earlier prediction of 7.6% but still ahead of China’s 6.7% growth.
A laborer loaded a sack of red chilies into a supply truck at a wholesale market in Kolkata, India, Jan. 16, 2017.
None of these comparisons is exact. The IMF and World Bank both follow India’s practice of presenting output growth for the fiscal year, which ends March 31. China’s numbers—as with those of nearly every other large economy—are for the calendar year.
Still, the downgrades reflect deep uncertainty about India’s economic health since Nov. 8, when Prime Minister Narendra Modi stunned the country—and the world—by declaring all of the country’s high-denomination bank notes null and void for transactions. The move, aimed at flushing out stacks of cash amassed by businessmen and crooked bureaucrats, has driven families to cut back on spending, companies to let go of workers and investors to put projects on hold.
Earlier this month, India’s Central Statistics Office said it expected growth for the financial year to come in at 7.1%. But that projection was calculated using economic data only through last October, before the currency move was announced. More-recent data weren’t—and in some cases, still aren’t—available to statisticians.
After a summer lull, China’s economy is likely to have picked up, if only slightly, in August, according to economists.
The stirring in business activity, while lackluster, points to stabilization in the world’s second-largest economy, a survey of 15 economists by The Wall Street Journal showed. August data numbers to be released in coming days are expected to show that factory output improved marginally and new bank credit picked up, while investment and retail sales slowed, though not by much, the survey said.“We expect the upcoming August data release to show China’s economic activity finding a slightly firmer footing after July’s more-than-expected weakening,” said economists at UBS Securities Asia Ltd.
A surprising rise in a key gauge of manufacturing activity earlier this month buoyed the outlook for many economists.Industrial output, a rough proxy for economic growth, likely grew 6.2% in August from a year earlier, compared with a 6.0% increase in July, the survey showed. Fixed-asset investment outside rural households, a key gauge of construction activity, likely expanded 7.9% for the January-to-August period, slightly slower than an 8.1% increase over the first seven months.
Retail sales likely climbed 10.1% in August, a tick down from July’s 10.2% growth.
Among the other positive signs, the consumer-price index, a main gauge of inflation, moderated, likely rising 1.6% from a year earlier last month and slightly slower than the 1.8% growth in July, the survey found. Meanwhile, the producer-price index, a gauge of factory gate prices, likely dropped 0.9% from a year earlier last month, improving from a 1.7% decline in July and continuing a march out of deflationary territory where it has been for more than four years.
The better performance should give policymakers confidence to stay the course and refrain from interest-rate cuts or other aggressive easing measures, economists said.
At the same time, the faint improvements are largely the result of better performance of large firms that benefit more from policy support, economists said, while growing piles of debt and percolating bubbles in the property market are a looming concern for policymakers.
“At this moment, the key constraint faced by China’s monetary policy is not inflation, but the property market and the financial market,” said economists at Macquarie Capital Ltd.
Chinese banks probably gave out 792.5 billion yuan ($118.69billion) in new credit last month, well above July’s 463.6 billion yuan, the survey of economists showed. The economists mainly attributed the rebound to seasonal patterns, since banks tend to pick up the pace of lending at the end of each quarter.
In July almost all the new credit went to medium- and long-term household loans, predominantly mortgage lending. Lending to corporate borrowers, however, recorded a net drain of 2.6 billion yuan, the first negative growth in 11 years.
Household mortgage loans may have continued to surge in August. Recent data show a jump in housing transactions in many cities, and housing prices continue to rise. Credit demand from the corporate sector likely remained sluggish, though may have improved mildly, economists of Standard Chartered Bank.
Trade also remained anemic. Outbound shipments likely declined 4.0% from a year earlier in August, compared with July’s drop of 4.4%, while imports likely dropped by 5.0%, improving notably from July’s 12.5% dip, the same poll showed. Improvements in imports reflect last year’s low base, likely slightly better industrial production activity, and continued easing of import price deflation, UBS economists noted.
That would bring the country’s trade surplus to $59.40 billion last month, widening from July’s $52.31 billion. A large trade surplus should lend support to the country’s hoard of foreign currencies, which is expected to have dropped only slightly last month. The nation’s total reserves likely fell by about $2 billion last month to $3.199 trillion, the survey showed.
It’s been two years since India emerged as the world’s fastest-growing major economy, but the rapid expansion has done little to improve the lot of Ashok Kumar.
Parked up and sitting on the kerb, the 25-year-old truck driver is going nowhere fast. He is the sole breadwinner for the 13 people in his extended family and his monthly salary is stuck at $150.
With new, better-paid jobs hard to come by, Kumar lacks options. He fears becoming unemployed like his elder brother, who recently returned to their village in Uttar Pradesh after months of searching in vain for work.
Data out on Wednesday showed India’s economic growth slowed to 7.1 percent in the quarter to June, a 15-month low. That is faster than other major economies, but not fast enough to create enough new jobs to absorb all the one million people who join the workforce every month.
A government survey found that job creation fell by more than two-thirds in 2015. Analysts at HDFC Bank estimate that for every percentage point the economy grows, employment now adds just 0.15 of a percentage point – down from 0.39 in 2000.
“For one job, there are at least 20 candidates,” said Kumar. “If you want the job, you can’t afford to bargain.”
Nearly two-thirds of India’s 1.3 billion people are under 35 years old. This rising demographic “bulge” will create the largest working-age population in the world. At the same time China, which has long curbed family size, will age as a society.
Whether this so-called demographic dividend will translate into the kind of economic gains seen in Japan and Korea, or lead to upheavals, depends on India’s ability to generate jobs.
Yet, despite average annual growth of 6.5 percent between 1991 and 2013, India added less than half the jobs needed to absorb new job seekers.
Under Modi, India has opened up further to foreign investment, hoping to generate more manufacturing jobs. A loan scheme for small businesses has been set up and there are plans for a $1.5 billion fund for startups.
Modi has also launched a programme to train over 4 million people in different skills in six years.Pronab Sen, country director for the International Growth Centre, a British-backed think tank, said such measures were “laudable”, but they aimed at boosting supply when more demand was needed.
“India has become a demand-starved economy,” Sen said. “If there is no demand, there will be no incentive to produce more which, in turn, will mean no new jobs.”
The level of desperation for work is staggering. In August, nearly half a million people, including post-graduates, applied for 1,778 jobs as sweepers in the city of Kanpur.
This was not a one-off. Last year, in Uttar Pradesh, 2.3 million people sought 368 low-level government jobs that required a primary education and ability to ride a bicycle.
Competition for such jobs has become fiercer as the public sector’s share in formal employment is declining.
Two years of drought has caused distress in farming, while the construction business has suffered a prolonged downturn – making work scarcer in the two sectors that employ the bulk of India’s unskilled workforce.
Satellite cities around the capital, like Greater Noida were, until recently, bustling with construction activity.
Now, Greater Noida’s skyline is dotted with half-built, abandoned, high-rises. Cranes and diggers stand idle.
In Delhi and the surrounding National Capital Region, housing starts fell 41 percent year-on-year in the first half of the year, according to consultancy Knight Frank. Across India, starts were down 9 percent from a year earlier.
Bhuwan Mahato, a contractor who supplies workers to construction projects around Noida, says demand for labour is down by at least 25 percent.
“I wish I hadn’t joined this business,” said Mahato, a 30-year-old migrant from the state of Bihar. “But, truthfully, there are no other opportunities, either.”
Indian factory activity expanded at its fastest pace since mid-2015 in August, helped by surging new orders, while only modest price increases should give the central bank scope to ease policy further, a survey showed.
The data will cheer policymakers after an official report on Wednesday showed Indian annual economic growth slowed in the April-June quarter to 7.1 percent, short of expectations for 7.6 percent in a Reuters poll.
The Nikkei/Markit Manufacturing Purchasing Managers Index rose to 52.6 in August from July’s 51.8, marking its eighth month above the 50 level that separates growth from contraction.
“Manufacturing PMI data show that the positive momentum seen at the beginning of the second semester has been carried over into August, with expansion rates for new work, buying levels and production accelerating further,” said Pollyanna De Lima, economist at survey compiler Markit.
The new orders sub-index, which takes into account both domestic and external demand, was 54.8 in August – its highest since December 2014 and indicating robust demand for Indian manufactured goods.
That pushed factories to increase production and the output sub-index climbed to a 12-month peak in August.But price growth lost momentum last month, with raw material costs increasing at their weakest rate in six months and output prices barely rising at all, suggesting consumer inflation could cool in coming months.
“In light of these numbers, the Reserve Bank of India has scope to loosen monetary policy in the upcoming meeting to further support economic growth in India,” De Lima said.On Oct. 4, the RBI is due to announce its first policy decision under newly-appointed governor Urjit Patel, who economists expect to broadly follow in outgoing chief Raghuram Rajan‘s footsteps.
Economists in a Reuters poll last month predicted the RBI would cut the repo rate by 25 basis points to 6.25 percent in the final three months of the year.
They see little steam left in the RBI’s current easing cycle, in which the policy repo rate has come down by 150 basis points since January 2015, to its lowest in more than five years.Consumer inflation in India was 6.07 percent in July, well above the RBI’s March 2017 medium-term target of 5 percent.
India Inc. is finally starting to report the kind of growth one would expect from companies in the world’s fastest-growing large economy.
India’s biggest companies have been stuck in a rut for the last two years even though the country surpassed even China in terms of gross domestic product growth and it voters picked a prime minister who pledged to boost business.
Last quarters’ earnings suggested things may at last be looking up.In the three months ended June, the net profit of companies in the benchmark index, the S&P BSE Sensex, rose 7% compared to a year earlier. While a few companies still haven’t announced results yet, so far it looks like the highest growth for Sensex companies in two years.
Take out the earnings at banks–which are being hurt as the Reserve Bank of India forced them to write off more soured loans–and the profit picture is even prettier. Profit at the non-financial Sensex companies jumped 15% during the quarter, according to data from broker Motilal Oswal Securities Ltd.
While the outlook on global demand is gloomy, hurting exporters and software companies, local demand is strong and getting stronger.
“The earnings growth mostly came from companies focused on domestic demand rather than companies relying on global markets,” said Vivek Mahajan, head of research at Aditya Birla Money.
Companies selling products to people in India can expect even more demand later this year as above-average monsoon rains bolster farmers’ incomes and government employees receive a massive wage hike, he said.
Sectors such as cement, consumer goods, and auto makers are going to be big beneficiaries of the rising consumer demand.
The country could create sustainable economic conditions in five ways, such as promoting acceptable living standards, improving the urban infrastructure, and unlocking the potential of women.
Twenty-five years ago, India embarked on a journey of economic liberalization, opening its doors to globalization and market forces. We, and the rest of the world, have watched as the investment and trade regime introduced in 1991 raised economic growth, increased consumer choice, and reduced poverty significantly.
Now, as uncertainties cloud the global economic picture, the International Monetary Fund has projected that India’s GDP will grow by 7.4 percent for 2016–17, making it the world’s fastest-growing large economy. India also compares favorably with other emerging markets in growth potential. (Exhibit 1).
The country offers an attractive long-term future powered largely by a consuming class that’s expected to more than triple, to 89 million households, by 2025.Exhibit 1
Liberalization has created new opportunities. The challenge for policy makers is to manage growth so that it creates the basis for sustainable economic performance. Although much work has been done, India’s transformation into a global economic force has yet to fully benefit all its citizens. There’s a massive unmet need for basic services, such as water and sanitation, energy, and health care, for example, while red tape makes it hard to do business. The government has begun to address many of these challenges, and the pace of change could accelerate in coming years as some initiatives gain scale.
From our vantage point, India has an exciting future. In the new McKinsey Global Institute report India’s ascent: Five opportunities for growth and transformation, we look at game-changing opportunities for the country’s economy and the implications for domestic businesses, multinational companies, and the government. The five areas we focus on by no means provide a comprehensive assessment of India’s prospects, but we believe they are among the most significant trends. Foreign and Indian businesses would do well to recognize these opportunities and reflect on how to exploit them.
1. From poverty to empowerment:
Acceptable living standards for allThe trickle-down effect of economic liberalization has lifted millions of Indians from indigence in the past two decades. The official poverty rate declined from 45 percent of the population in 1994 to 22 percent in 2012, but this statistic defines only the most dismal situations. By our broader measure of minimum acceptable living standards—spanning nutrition, water, sanitation, energy, housing, education, and healthcare—we find that 56 percent of Indians lacked the basics in 2012.
The country will need to address these gaps to achieve its potential. The task is certainly within India’s capacity, but policy makers will have to promote an agenda emphasizing job creation, growth-oriented investment, farm-sector productivity, and innovative social programs that help the people who actually need them. The private sector has a substantial role to play both in creating and providing effective basic services.
2. Sustainable urbanization:
Building India’s growth enginesBy 2025, MGI estimates, India will have 69 cities with a population of more than one million each. Economic growth will center on them, and the biggest infrastructure building will take place there. The output of Indian cities will come to resemble that of cities in middle-income nations (Exhibit 2).
In 2030, for example, Mumbai’s economy, a mammoth market of $245 billion in consumption, will be bigger than Malaysia’s today. The next four cities by market size will each have annual consumption of $80 billion to $175 billion by 2030.Exhibit 2To achieve sustainable growth, these cities will have to become more livable places, offering clean air and water, reliable utilities, and extensive green spaces. India’s urban transformation represents a huge opportunity for domestic and international businesses that can provide capital, technology, and planning know-how, as well as the goods and services urban consumers demand.
3. Manufacturing for India, in India
Although India’s manufacturing sector has lagged behind China’s, there will be substantial opportunities to invest in value-creating businesses and to create jobs. India’s appeal to potential investors will be more than just its low-cost labor: manufacturers there are building competitive businesses to tap into the large and growing local market. Further reforms and public infrastructure investments could make it easier for all types of manufacturing businesses—foreign and Indian alike—to achieve scale and efficiency.
4. Riding the digital wave:
Harnessing technology for India’s growthTwelve powerful technologies will benefit India, helping to raise productivity, improving efficiency across major sectors of the economy, and radically altering the provision of services such as education and healthcare. These technologies could add $550 billion to $1 trillion a year of economic value in 2025, according to our analysis, potentially creating millions of well-paying, productive jobs (including positions for people with moderate levels of formal education) and helping millions of Indians to enjoy a decent standard of living.
5. Unlocking the potential of Indian women: If not now, when?
Our research suggests that women now contribute only 17 percent of India’s GDP and make up just 24 percent of the workforce, compared with 40 percent globally. In the coming decade, they will represent one of the largest potential economic forces in the country. If it matched the progress toward gender parity of the region’s fastest-improving country, we estimate that it could add $700 billion to its GDP in 2025. Movement toward closing the gender gap in education and in financial and digital inclusion has begun, but there is scope for further progress.
Public-sector efforts to address the five areas are under way. The government is attempting to improve the investment climate and accelerate job creation—India’s ranking on the World Economic Forum’s Global Competitiveness Report climbed to 55 in 2015–16, from 71 a year earlier. Officials are moving to make the government more efficient, using technology that can leapfrog traditional bottlenecks of a weak infrastructure. One billion Indian citizens, for example, are now registered under Aadhaar, the world’s largest digital-identity program and a potent platform for delivering benefits directly to the poor.
Realizing India’s promise will require national, state, and local leaders to adopt new approaches to governance and the provision of services. To meet the people’s aspirations, these officials will also need new capabilities. The requirements include private sector–style procurement and supply-chain expertise, deep technical skills for planning portfolios of infrastructure investments, and strong project-management capabilities to ensure that large capital projects finish on time and on budget. Training will be needed to help staff members use digital technologies to automate and reengineer processes, manage big data and advanced analytics, and improve interactions among citizens through digitized touchpoints, online-access platforms, portals, and messaging and payment platforms. The government could acquire these capabilities by adopting quality-oriented procurement policies and taking advantage of secondments from the private sector. For businesses, India represents a sizable market but will require a granular strategy and a locally focused operating model.
No single report can capture all the changes taking place in the country, but we have tried here to identify the most significant trends. Foreign and Indian businesses should consider how their strategies will be influenced by them. Policy makers should focus on helping all stakeholders to capitalize on them. By any measure, the challenge is daunting, but success could give a historic boost to India’s economy.
China is now an equal or even bigger driver of export growth in neighbouring economies than the US and EU combined, marking a significant shift in the economic pecking order since the 2008 global financial crisis.
That’s according to research by Deutsche Bank AG economists who weighed up the influence of the US and China over the rest of Asia through the prism of export growth, as well as the currency and bond markets.China committed to free trade, market reforms, says senior official
“This is noticeably different from the pre-crisis years when China was much less important –- bordering on irrelevance – as an engine of growth in the region,” Deutsche analysts led by Asia-Pacific chief economist Michael Spencer wrote in a note.
After a rocky start to the year, China has been aided in its growth prospects by a record surge in credit in the first quarter. Key indicators for May are expected to show that the economy is continuing to find its footing and growth is on track to hit the Communist Party’s goal of 6.5 per cent to 7 per cent for 2016.
The International Monetary Fund in April upgraded its China growth forecasts by 0.2 percentage point for this year and next, following signs of “resilient domestic demand” and growth in services that offset weakness in manufacturing.
China needs market-driven interest rate system to help yuan become global currency: economists
Beyond the pace of GDP growth, China’s currency gyrations are also increasingly important across the region. While the dollar still drives volatility in most Asian currencies, the yuan is as least as important for fluctuations in the Malaysian ringgit and South Korean won and is growing in significance for other exchange rates, except the Philippines peso.
“Asia is far from being a ‘yuan bloc’, but idiosyncratic shocks to the yuan cannot be ignored,” according to the Deutsche analysts.
The People’s Bank of China (PBOC) surprised traders this week by setting the reference rate at weaker-than-expected levels, helping send the currency to its biggest declines in four months versus a trade-weighted basket that includes the yen and the euro. The rate’s fixing had become more predictable since early February after the PBOC pledged greater transparency and the yuan increasingly tracked moves in the dollar against major currencies. That was after a sudden weakening of the yuan in January fuelled fears of a devaluation and triggered global market turmoil. During the subsequent three months, the central bank adopted a more market-based system to set the rate and said the basket would play a bigger role.
China cooling imports are sending a huge chill across the global economy
But the US still dominates in the bond markets, and moves in Treasury yields continue to steer Asian bond trading. And even if Asia central banks don’t match rate tightening by the US Federal Reserve, financial conditions in the region may tighten if US yields increase.
“We find only weak evidence that fluctuations in Chinese yields have any impact on other countries’ bond markets,” the analysts said.
Indian companies are posting their best earnings results since Prime Minister Narendra Modi swept to power two years ago, giving the clearest sign yet that India’s fast, but patchy, economic growth is becoming more broad-based.
Though headline growth figures make India one of the world’s fastest growing economies, weak private investment and low capacity utilization rates have painted a less rosy picture.
Going by India Inc’s surge in profit growth in the first three months of the year, however, the outlook really does seem to be brightening, as benefits feed through from lower interest rates and government spending in infrastructure and defense.
On Tuesday, India will release gross domestic product data for the January-March quarter. Year-on-year growth of 7.5 percent is forecast by a Reuters survey economists, slightly faster than the previous quarter’s 7.3 percent.
“Macro indicators are suggesting that at the ground level the economy is gaining momentum,” said Dhiraj Sachdev, a fund manager at HSBC Asset Management in Mumbai.
“That has also been validated in terms of better corporate earnings in many of the sectors.”
Operating profits for 289 companies that have reported results so far leapt 25.5 percent year-on-year in the March quarter, compared with 1.7 percent growth in the previous quarter, according to Thomson Reuters data.
It is Indian firms’ best showing since the April-June quarter in 2014.
Put alongside the 6.8 percent decline in earnings that data provider Factset reckons companies in the S&P 500 suffered during the same quarter, India’s corporates have some things going in their favor.
India’s broader National Stock Exchange share index .NSEI has surged around 17 percent from a near 2-year low on Feb. 29, outperforming a 7 percent gain by the Asia-Pacific MSCI index excluding Japan .MIAPJ0000PUS.
This week, Morgan Stanley upgraded Indian equities to “overweight” from “equalweight” citing rising dividends, and prospects of a simpler country-wide sales tax, lower interest rates and benign monsoon among its reasons.
China has set an economic growth target of between 6.5% and 7% for 2016 and an average of at least 6.5% over the next five years, goals that acknowledge slowing momentum in the world’s second-largest economy but which still could be difficult to reach.
As WSJ’s Mark Magnier reports:
By adopting a range for the first time in two decades, China has given itself more flexibility in a system where hitting goals set far in advance, regardless of conditions on the ground, remains politically important.
The targets released here on Saturday at the opening of the National People’s Congress, China’s annual parliament, weren’t a surprise given that senior officials from President Xi Jinping on down had flagged them in recent months.
But they underscore that the government continues to prioritize stability, as output in the world’s second-largest economy downshifts faster than expected.
Last year, China’s economy grew 6.9%, its slowest pace in 25 years, compared with the 2015 target of about 7%. This year could bring a new quarter-century low, as traditional growth engines continue to lose traction.